Forecast accounts, in cash flow, profit and loss and balance sheet format, are essential to plan your business finances. All too often, however, business owners only prepare them when absolutely necessary and usually for the wrong reasons, possibly at the insistence of your bank. This usually means that you are looking to borrow money, and, if you had prepared them from the outset, you would have seen the need to borrow such money well in advance. Not having prepared them in advance now places you at a distinct disadvantage.

 

It is more than likely that you have run out of cash and the only way that you can survive is to borrow money. Control of your business has therefore been lost and you are relying on a funder to support you. If you had applied to the funder well in advance, before you actually needed the money, you would have given yourself more options in the event that they should turn your request down.The only way that you can assess your future finances is by short-term and long-term financial planning. This will cover not just cash, which is of primary importance, but also profitability and growth.

 

All of the forecasts must be prepared on a realistic basis, and if anything, you must be pessimistic rather than optimistic. This will, in effect, give you the worst case scenario. It is far better to work on this basis and then demonstrate that you can achieve a better performance.

The Cash Flow Forecast

This is probably the most important of all your forecasts. A cash flow forecast is used to project the flow of cash into, and out of, your business. It is not concerned with profitability or growth, it is totally focused on your cash situation, normally referred to as ‘liquidity’.

Liquidity, in terms of actual cash, is essential to all businesses no matter what their size. Orders from customers are of no value whatsoever if you do not have the funds to manufacture the goods. In the same way, a warehouse full of stock will not pay the wages unless the goods can be sold and thereby converted into cash.

In simplistic terms cash flows through your business as follows:

From this simple diagram you can see that if any part of the process is disrupted, for example, by late or non-payment by your customers, then you are likely to encounter a shortage of cash. Planning for such disruptions in cash flow will give you greater control over your financial stability and, in the long run, the whole viability of your business.

Income From Sales

It is extremely important that you accurately estimate the income that you are going to receive. This forms the whole foundation of your business and if you over-estimate the cash you are going to receive you could be placed in serious difficulty. This has been shown to great effect with the forecasts prepared for the Millennium Dome. So optimistic were the forecasts that within months of opening, with the anticipated visitor numbers not materialising, extra funds had to be obtained to avoid early closure.

Sales income will generally be received either in cash for immediate payment or on credit for payment at a later date. With forecasts, the cash element can be shown as being received in the month the sales were made. The credit sales will be dealt with differently.

Dealing With Credit Sales

At the outset you will have agreed a defined payment period for your debtors to pay for the sales that you have allowed on credit. This could be for any term from, say, 30 days up to 90 days depending on the industry in which you operate.

Once again, however, you need to be pessimistic with your forecasts. Inevitably there will be some slippage in payment receipts and it is better to build them into your forecasts from the outset. In addition, there could be a small element that abuse the credit facility and take much longer than the standard payment time.

It is normal, therefore, to build a further contingency into your forecasts. If, for example, you offer credit terms of 30 days, some forecasts may be prepared on the basis of 70% of sales being received in the month after the sales have been made. A further 20% of the month one sales will be received in month three with the balance of 10% being received in the month four. With experience you will be able to define when payments are actually received.